29th Jul 2016 12:41
LONDON (Alliance News) - UK energy regulator Ofgem has outlined concerns about the payment system for small generators of electricity in the UK that bypass the transmission network when providing backup power at peak times of energy use.
Electricity in the UK begins its journey by being generated within a plant before being sent to the transmission network that transports the electricity to a smaller, more localised distribution network that then delivers the electricity to the end user, such as a residential home or business.
The major difference between the transmission and the distribution networks is the voltage. The transmission network transports high voltage electricity from the source before the distribution network lowers the voltage so it can be used by the end user.
The transmission network in England and Wales is owned and operated by the sole system operator National Grid PLC, which also operates but does not own the Scottish transmission system.
There are multiple distribution networks in Great Britain as they are more focused on specific regions and there are currently 14 licensed operators that are all owned by six different companies.
SSE PLC owns two of those operators, Scottish Hydro Electric Power Distribution PLC and Southern Electric Power Distribution PLC, and the other operators are owned by Electricity North West Ltd, ScottishPower Energy Networks, UK Power Networks and Western Power Distribution.
Notably, there are also some smaller distribution networks that are owned and operated by independent network operators, and they lie within areas covered by the larger network operators.
The set up of the UK's electricity infrastructure means energy suppliers, such as the Big Six, purchase electricity from the company that generates it, pay for that electricity to be transported through the transmission and then the distribution network, allowing energy suppliers to then sell and deliver electricity to the end user.
Some companies, mostly the larger ones, are vertically integrated to some form of degree within the industry. SSE, as a distribution network operator, for example, also generates and sells electricity. The transmission network is the only system that other companies are not involved in as National Grid carries that responsibility on its own.
However, there are some power plants that are directly connected to the distribution network, meaning the electricity generated does not have to flow through the transmission network.
The primary responsibility of most of the plants bypassing the transmission network is to provide backup power, or extra power to meet increased demand during peak times, which usually occurs in the winter.
The smaller plants that are directly connected to the distribution networks are usually using diesel generators, gas or combined heat and power plants to generate electricity as they can be turned on as and when needed and immediately supply power, compared to something like a solar or wind farms that can only generate electricity intermittently, making them unsuitable to rely on for immediate backup power.
There are huge benefits to connecting straight to the distribution network and avoiding the transmission network. Every company that wants to use the transmission network, for example, has to pay National Grid for the privilege.
The small backup plants are called upon when the energy supplier needs extra power at peak times of energy use, allowing the plants to be switched on and immediately supply extra energy to the energy supplier's customers.
As the extra electricity is only transported through the distribution network, therefore bypassing the transmission network, energy suppliers manage to avoid having to pay National Grid for using the network.
Equally, the electricity generator gets a windfall as it is paid for the electricity it provides and receives further, additional payments from energy suppliers for helping them reduce what Ofgem calls the "biggest element of the electricity transmission charges they face at peak times" by avoiding National Grid's network.
One other reason that increasing numbers of generators are opting to connect directly to distribution networks is because of some constraints within National Grid's transmission network, with flexible power generation needed more as the UK's fossil fuel power stations close.
Interestingly, a UK parliamentary committee earlier this month recommended breaking up National Grid's monopoly over the transmission network, claiming the company has "conflicts of interest." The Energy & Climate Change Committee called for a move toward local energy networks, supporting the increasing numbers of generators connecting directly to more regional distribution networks.
Notably, the committee ultimately recommended National Grid keeps its role as system operator as there was "no evidence" that the firm had breached any rules. However, the idea of transferring the role to a publicly-owned, non-profit entity will continue to linger.
AIM-listed Plutus PowerGen is one company that has built an entire business around providing flexible electricity generation, constructing diesel generators around the country to supply power when it is needed alongside some other solar assets.
Plutus does take advantage of being able to supply electricity directly to energy suppliers during peak times under the payment system in question, known as 'triad' demand periods.
Plutus was not immediately available to comment when contacted by Alliance News.
Ofgem, in an attempt to make a "level playing field" for all generators in the country, published an open letter Friday highlighting its concerns about how this part of the industry works - claiming it may be "distorting energy markets".
The reason Ofgem thinks the system is unfair is because electricity generators that are connected to the transmission system rather than the distribution network do not get those payments, nor do larger electricity generation plants that are connected directly to the distribution network.
"This puts them at a competitive disadvantage," said Ofgem. "The electricity system is changing rapidly and there has been a major increase in generators connecting to the distribution networks over the past couple of years. The level of these payments has increased significantly and is due to rise even further."
The regulator claims that energy suppliers pay these smaller generators connected to the distribution network around GBP45 per kilowatt of electricity that is generated during peak times, which it claims is more than double the standard clearing price for electricity generated under the 2015 capacity market auction.
Notably, Ofgem said that price is expected to rise to GBP72 per kilowatt in four years, equal to a 60% increase.
"Ofgem thinks that these arrangements may be distorting energy markets and that there should be a level playing field for all generators. This could also impact on the decisions to either build or close large power stations which also play an important role in delivering security of supply," said Ofgem.
"Ofgem is asking for views on these concerns which will feed into our thinking including on several proposals that have been raised by industry parties to change network charging rules. Ofgem encourages industry stakeholders to respond to the open letter and engage in the consultation process for these rule changes before they come to us for a decision," Ofgem added.
The open letter effectively kick-starts a consultation period and Ofgem said it would also consult on "some other aspects" surrounding the issue in the Autumn.
By Joshua Warner; [email protected]; @JoshAlliance
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